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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: Jacob Snyder who wrote (51113)	4/25/2002 12:49:33 AM
From: Mike Buckley	Respond to of 54805

Jacob, I get a kick (for lack of a better word) when Qualcomm so blatantly issues a press release saying that it's "strategic investments" are excluded from pro forma earnings. If those same strategic investments start making money, something tells me they'll no longer exclude them. At that point (with facetious mode enabled), they'll probably rename QSI so its investments are considered more important than anything merely strategic, thus justifying a decision to include the profits in pro forma statements. Perhaps they will, at some point in the future, become a profitable business. Where do I find the tax benefits related to stock options? They aren't listed in the way I'm used to seeing on the operating cash flow statement. The reason I ask: not accounting for those benefits, the company threw off about $0.20 to $0.22 of free cash flow for every dollar of revenue in FY00 and FY01, respectively. And free cash flow in Q1 was about 40% of all of last year. --Mike Buckley

To: Jacob Snyder who wrote (51113)	4/25/2002 3:25:10 AM
From: tinkershaw	Read Replies (2) \| Respond to of 54805

The large losses continue, and investors start valuing the company based on GAAP results. I think this is an inaccurate statement. Accounting is a system of statistics. You can change the methodology to better track the statistics. However, just because the manner of collecting and reporting statistics changes does not mean that the Yankees will score less runs next year. Nor does it matter if errors are less strictly interpreted, thus reducing batting averages in the league. The Yankees will still score the same amount of runs regardless of the accounting rule for hits. It is the same with business. Point in evidence, AOL/Time Warner. They post a $54 billion loss due to a change in the GAAP accounting for goodwill. The stock is up in after hours. Why is that? Well, the underlying business did better than expected and is a cash machine. In addition, this goodwill comes from the fact that AOL used its inflated AOL share currency to acquire a non-bubble company. AOL would essentially probably need 2x or more of its shares than it used to initially acquire Time Warner were it to acquire Time Warner today. So, according to GAAP, AOL overpaid. According to common sense, AOL got 2x as much for its shares at today's prices, than it probably could have hoped to acquire, if at all, had it tried the deal. So perversely AOL has $54 billion in losses from Goodwill. In reality AOL is better off having made the deal with inflated stock, and thus "inflated price" than it would be trying to do the same thing today. The loss has no material meaning whatsoever in this case, and it demonstrates how accounting mechanisms do not determine value of a company. What determines value is the ability to generate free cash flow into the future, adjusted for risk and the time value of money. It just so happens that Gorilla do this, better, more sustainably, and with less risk than any other investment on the planet. Thus their valuations. With AOL, if I'm Steve Case I can hardly be regretting buying Time Warner for $.50 on the dollar compared with what AOL would have had to pay in terms of number of shares to do the same deal today. So I guess my beef is, and I get the same way about political correctness and the use of political spin, is that the reality here is the goodwill charge is meaningless in this particular case, it really is. And that the market is not going to re-value AOL/Time Warner because GAAP says they lost $54 billion, because it is not a material charge. Might as well liberalize the error rule, reduce the Yankee's team batting average because more errors will be called, and then state this will materially affect the Yankee's win loss record. This said, sometimes goodwill is material, particularly as to losing future investment income, or the quality of management investment decisions. In AOL's case it really is not, and just because GAAP says it reduces profits, does not mean the market will give a hoot if it has no economic meaning. As for QCOM, the goodwill losses demonstrate past bad investments. It is opportunity cost lost. However, said lost opportunity costs are backward looking. As such they are irrelevant to future financial results, other than any future growth anticipated from selling products through these investments that may have been incorporated into the stock price. As such they are instructive as to management's quality of investments, and to expect future wealth destruction through the same in the future. As such, one might expect a lower multiple to account for this. On the other hand, it is past lost opportunity cost and has no material affect on future cash flows. So the change in GAAP methodology for accounting for Goodwill means absolutely nothing as to a company's valuation. The market will value QCOM based upon future anticipated free cash flow, discounted for risk and the time value of money. These goodwill losses are irrelevant to these calculations other than lost future sales these investments may have produced that may have been anticipated in the stock price. So to conclude, the market is not going to change its valuation of a stock simply because GAAP rules changes. The change in GAAP rules is to provide greater or lesser disclosure. Valuation is based upon free cash flow generation, risk and the time value of money, all compared to other investment opportunities. A change in GAAP changes none of this. Or in other words, accounting is a system of presenting financial statistics. Just because one changes the manner one collects and presents these statistics does not change one iota the underlying business fundamentals, anymore than liberalizing the error rule for batting statistics, and thus lowering the Yankee's team batting average, is going to affect one bit the amount of wins the Yankee's get this year. It is simply a statistical choice. I guess one more quick example. Did you know that patents developed in house are not included as assets on the balance sheet? But that if you acquire a patent from someone else that you can then include it as an asset. Seems an arbitrary rule. As such, there has been strong argument that GAAP should eliminate the distinction and value all patents (whether developed in-house, or through acquisition) on the balance sheet as an asset. Such a rule would increase the balance sheet assets of high-tech companies. But do you think this would actually increase the way the Street values the company? No, it is simply an arbitrary rule that changes none of the fundamentals. Tinker

To: Jacob Snyder who wrote (51113)	4/25/2002 8:43:46 AM
From: slacker711	Respond to of 54805

FWIW....I posted some thoughts on QSI over on the unmoderated thread. Message 17375261 I actually think that QSI has a decent chance of being profitable by the end of the year. If all goes well, Vesper could be EBITDA profitable by the end of the year. This is a bigger deal for Vesper than most carriers since they have very little debt. The flat-rate offer has worked in most other countries, I see little reason why it wouldnt work in Brazil. The biggest risk is that the regulatory agency in Brazil (Anatel) rules that Vesper must sell fixed CDMA units instead of mobile ones. OTOH...though they may make a profit on a quarterly basis, I still see a significant chance of write-offs. I have no idea how well ZAPP is doing.....or a half-dozen other investments. As I said in my post on the unmoderated thread....I am hoping that this practice ends with the roll-out of W-CDMA. Slacker